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When shopping online at a major retailer, you’ve probably noticed the option of using a “buy now, pay later” loan to finance your purchase. These loans have a fixed number of maturities, sometimes interest-free, over several weeks or months.
The popularity of BNPL loans has skyrocketed over the past year as people have spent more time shopping online due to the pandemic. A recent study by Ascenta Motley Fool service, found that 56% of consumers said they had used a BNPL service at least once, up from 38% the previous year, an increase of almost 48%.
Consumers should also be aware of the potential risks and drawbacks of using these types of loans. Unlike credit cards, many BNPL loans, especially short-term loans, are not reported to the credit bureaus. Therefore, when younger or subprime borrowers opt for BNPL loans, their credit scores will generally not be affected by a timely BNPL payment history.
However, the three major US credit bureaus – Equifax, Experian and TransUnion — seek to change this by including information regarding BNPL consumer loans on credit reports.
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News of the changes comes just months after the Consumer Financial Protection Bureau announced in december that it would launch an investigation of BNPL’s top five suppliers, demanding that they submit information so that the Bureau can keep the public informed of current industry practices and potential risks.
Below, Select examines how Equifax, Experian and TransUnion plan to report BNPL loans on consumer credit reports.
In February, TransUnion announced it would work with FICO and VantageScore to include point-of-sale financing in its future credit models.
While it may seem like a welcome change for the credit bureaus to use BNPL loans in calculating an individual’s FICO or VantageScore, these loans have the potential to lower consumers’ FICO credit scores even if they repay them on time. The reason: BNPL loans are generally short-term installment loans.
The length of your credit history is a factor used to calculate your FICO score – it makes up 15% of your score. When you repay a short-term BNPL loan, it means you are closing a line of credit, which can lower your average credit age and potentially affect your overall FICO score.
TransUnion tries to solve this problem by not counting all BNPL loans in the calculation of an individual’s basic credit score.
Instead, BNPL loans will be listed in a separate part of the credit report, says Liz Pagel, senior vice president at TransUnion. Therefore, a consumer’s BNPL loan history will not be used to calculate their credit score, but will still be included in their credit report.
While TransUnion plans to use BNPL loans in calculating consumer credit scores in the future, Pagel predicts it may take a few years for credit bureaus and reporting models to adapt. Because BNPL loans can lower the average credit age, she suggests that in the future, credit bureaus should omit any information about a person’s BNPL loans that might unfairly lower a person’s credit score. a person.
According to Pagel, it will be up to the lender to decide whether or not they want to know more information about a consumer’s BNPL history, particularly if they believe the information is necessary to make lending decisions.
Pagel says BNPL loans are currently reported on a monthly basis, however, the credit bureau plans to release BNPL loan information every two weeks in the future due to the way these loans are structured – many require four installments over the course of six or eight weeks.
Since most credit reports are done on a monthly basis, BNPL loans can end up being paid off soon after they appear on your credit report. Therefore, TransUnion intends to communicate BNPL loan information more frequently so that consumers can see the positive impact of paying on time and in full sooner.
Experian announced in January that it would launch the “Buy Now, Pay Later” desktop, which will collect information on an individual’s total number of outstanding BNPL loans as well as the total amount of their BNPL loans and the status of payments. Like TransUnion, Experian will not include BNPL loan information in the calculation of base credit scores, at least for now.
According to a press release from Experian“To protect consumers’ credit scores from immediate negative impact, detailed information relating to each BNPL transaction will be stored separately from Experian’s central credit bureau data.”
According to Greg Wrightproduct manager at Experian.
For now, Experian plans to separate BNPL information from basic credit bureau information due to how BNPL loans would be reported using traditional methods. In other words, since credit cards are considered a revolving line of credit, different transactions on your credit card will appear on a business line, which displays information about a specific credit account.
On the other hand, multiple transactions made with different BNPL loans appear as different trade lines on your credit file. For some lenders, having many different trade lines could indicate potentially risky behavior.
According to Wright, Experian has established a separate office for BNPL loans so that credit information for these loans does not negatively impact credit scores. Experian also plans to report information to this specialist bureau in real time instead of the usual 30-day delay.
On February 28, Equifax began allowing BNPL providers to report “paid in 4” loans. According to Tom Aliff, head of risk management consulting at Equifax, consumers who use BNPL loans will see them reported as revolving or installment accounts depending on how the BNPL provider chooses to list them.
With Equifax, unlike TransUnion and Experian, your BNPL provider might choose to include BNPL loans in your base credit score calculation.
According to a Equifax press release“The new industry code will classify BNPL’s business lines, including payment history, and give Equifax customers and rating partners the ability to view and decide how to incorporate the information into their decision to to potentially open up new consumer financial services opportunities to more consumers.”
Equifax produces bi-weekly BNPL loan reports. The credit bureau recently conducted a study on the impact of BNPL loans on consumer credit reports, looking at people who had at least one BNPL loan reported as a line of credit on their report. The average term was four months, longer than the typical BNPL pay-in-4 loan. The study also found that people who repaid their BNPL loans on time had an average FICO score increase of 13 points.
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At the end of the line
With each of the three major credit bureaus planning to collect information on BNPL loans, consumers who use them frequently may soon benefit from lenders’ scrutiny to determine their creditworthiness.
Still, not all credit bureaus plan to use BNPL loan information when calculating a consumer’s primary credit score – TransUnion and Experian will keep this separate while Equifax will let BNPL providers choose how they want loans reported on consumer credit reports.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.